Lambda Co. has bonds outstanding that mature in 10 years. The bonds have $1,000 par value, pay interest annually at a rate of 9%, and have a current selling price of $1,125. The yield to maturity on the bonds is less than 9%.

Question

Quizplus · Accepted Answer

The fact that the current selling price of the bonds is higher than their par value ($1,125 > $1,000) indicates that the yield to maturity is less than the coupon rate of 9%. This means that investors are willing to pay a premium for the bonds in order to lock in a higher-than-current-market interest rate.

Lambda Co Has Bonds Outstanding That Mature in 10 Years